In this Memorandum Opinion, the Court of Chancery (i) denied plaintiff’s motion for partial summary judgment on its claim that defendants breached a “prohibited investments” clause of an LLC agreement and (ii) granted, in large part, defendants’ motion to dismiss a number of plaintiff’s other claims. AM General Holdings LLC (“Holdco” or “Plaintiff”) brought this suit directly and derivatively on behalf of Nominal Defendant Ilshar Capital LLC (“Ilshar” or the “Company”) against defendants the Renco Group, Inc., ILR Capital LLC, and Ira L. Rennert (collectively, “Renco Parties”). Plaintiff asserted several counts relating to alleged breaches of the Amended and Restated Limited Liability Company Agreement of Ilshar (the “Ilshar Agreement”) and a claim for indemnification in connection with an unrelated action in the Southern District of New York.

The Court first addressed Plaintiff’s motion for partial summary judgment on its claim that the Renco Parties breached the Ilshar Agreement by causing Ilshar to make investments in affiliates of the Renco Parties in direct violation of a “prohibited investments” provision. The Court determined that the prohibited investments clause was unambiguous and that accordingly, in determining whether there was a breach of the agreement, the Court would not inquire beyond the ordinary and usual meaning of the provision. However, the Court held that the evidence submitted by plaintiff (Renco Party statements admitting possible violations of the prohibited investment clause) was not sufficiently conclusive of a breach to suggest that a reasonable fact-finder could find that the actions were in violation of the Ilshar Agreement. The Court therefore denied Plaintiff’s motion for partial summary judgment.

Turning to Defendants’ motion to dismiss, the Court first addressed Plaintiff’s claim that a pending lawsuit in the Southern District of New York triggered the indemnification clause of a Contribution Agreement by and among Holdco, Ilshar, and the defendants. The Court explained that “where a party’s entitlement to indemnification depends on specific facts and the underlying facts are currently being litigated elsewhere,” the claim for indemnification is not ripe. The Court dismissed Plaintiff’s indemnification claim without prejudice until the underlying facts were adjudicated in the Southern District of New York.

Defendants also moved to dismiss Plaintiff’s claim that the Renco Partners breached their duties of loyalty and care owed to Holdco and to the Company, and/or aided and abetted those breaches by causing Ilshar to make a prohibited investment. The Court dismissed these claims, explaining that “where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim and thus any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.”

The Court also dismissed Plaintiff’s claim against the Renco Parties for alleged tortious interference with the Ilshar Agreement because the Renco Parties were not strangers to the Ilshar Agreement or to the business relationship underpinning the Ilshar Agreement.” The Court explained that in addition to the traditional elements of tortious interference—requiring (1) a contract, (2) about which defendant knew, and (3) an intentional act that is a significant factor in causing the breach of such contract (4) without justification (5) which causes injury—the so-called “affiliate exception” requires that the defendant “be a stranger to both the contract and the business relationship giving rise to and underpinning the contract.” The affiliate exception recognizes that “where an entity under the control of a contracting party is used by that party as an instrument to breach the contract, it is improper to accord it separate status as a tortfeasor.” The Court found that the Renco Parties shared an economic interest and common control, and were also both parties to the transaction responsible for the agreements giving rise to the allegations in this dispute. For that reason, they could not be considered “strangers” to the transaction. The claim for tortious interference was therefore dismissed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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